Bizball

Are the Astros Really Losing Money?

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Depending on what you read, clubs in Major League Baseball are either making a massive profit, breaking even, or, if you listen to the owners, often running in the red. Since baseball is a private industry, trying to determine the truth is a matter of educated guessing, wild hyperbole, or a case of “no comment” coming from the league and clubs.

So when an owner talks about the financial status of the club he runs, it prompts a fair amount of discussion. As we’ve seen with the leaked financial documents from the likes of the Marlins and others, the truth typically is on the side of ownership not only making a profit, but a handsome one at that.

There are some very important semantics that need to be taken into account regarding that statement. The key word to latch onto is “franchise.” If you look at only the revenues and costs that the Astros themselves must cover, I can see very easily how Crane’s statement can be accurate. This includes only revenue streams attributed strictly to the club, such as gate receipts (attendance), television revenues (local/regional reached by the club), concessions, parking, suites, and other sources of that nature. In looking at player payroll and attendance in the final years of the Drayton McLane era and in the first year of Crane’s ownership, you’ll find that Crane has a good case. As he said upon purchasing the club, “The way we’ll approach it moving forward, and they’ve already started that, is get the payroll lined up with the revenue that’s coming in and continue to build our farm system. With the trades that have been made, we’ve got some very good prospects. I think you’ll see some more of that.”

So, Crane was speaking about club-controlled revenues. In order for his statement to hold true in the aggregate, the Astros’ own losses would have to also exceed their revenues from national broadcast deals, MLB Advanced Media, and other league-wide sources, not to mention the revenue-sharing checks that the organization has recently collected. Once you account for all of that, you’ll notice that the Astros are actually pulling in a hefty sum:

Centralized Revenue

National TV

$ 23,723,333

$ 711,700,000

MLBAM

$ 22,833,333

$ 685,000,000

MLB Network

$ 1,000,000

$ 30,000,000

Est.

MLB Properties

$ 800,000

$ 24,000,000

Est.

Revenue Sharing

$ 15,000,000

(Astros)

Est.

TOTAL (Before Local)

$ 63,356,667

The league’s national-television agreements with ESPN, FOX, and TBS are all set to expire in the near future, and when the newly reached deals kick in in 2014, that $711.7 million total haul will increase to $1.5 billion. According to a 2011 SportsBusiness Journal report, MLB Advanced Media revenues were $685 million annually. If we look at the leaked financial documents from the Marlins, we can make educated estimates for revenues from MLB Network and MLB Properties (merchandising), and also for revenue-sharing receipts. In 2009, the Marlins received a revenue-sharing boost of nearly $43 million; for the purposes of this analysis, we’ll be conservative and say that the Astros pulled in $15 million.

Add all of that up and, based on these figures, the Astros would have over $63 million in revenues from centralized sources alone.

So let’s say that’s it. What if there were a world in which only centralized revenues came into play, and as Crane said, the “franchise” was losing money? If we use the end-of-year payrolls for the 30 clubs provided by the Associated Press, for 2012 the Astros paid $81,139,621. This figure includes the amounts owed to every player on the 40-man roster, as well as salaries and pro-rated shares of signing bonuses, earned incentive bonuses, non-cash compensation, buyouts of unexercised options, and cash transactions. In some cases, parts of salaries that are deferred are discounted to reflect present-day values.

Our projected centralized revenues for the Astros come to $63,356,667. Subtracting $81,139,621 would put the Astros at $17,782,954 in the red. But, once we throw in conservative estimates of revenues for which the Astros themselves account, that negative switches to a positive very quickly.

Net Local Revenue

Local TV

$40,000,000

Expiring

Attendance

$48,376,686

1,607,733

$30.09

Average price

Adjustment

$10,000,000

Subtotal

$78,376,686

Now the picture becomes quite different. That $17,782,954 loss has become a $60,593,732 profit. The expiring television deal with FOX Sports Houston that the Astros saw end this past year pulled in $40 million annually. Attendance was 1,607,733 on the 2012 season, and, using the Team Marketing Report for 2012 (PDF), the average ticket price for the Astros was $30.09, so the franchise raked in more than $48 million in gate receipts. Since these are averages, we’ll fudge the numbers conservatively and subtract $10 million. That would mean net local revenues of $78,376,686—and remember, this doesn’t include radio, parking, suite, or concessions revenues, all of which could easily absorb our adjustment of $10 million.

In fairness to the Astros, this is before any front-office salaries are deducted, and it also excludes various other expenses, such as minor-league salaries and the costs associated with international-scouting operations and academies. Still, it’s hard to foresee those additional costs adding up to more than $60.5 million and, as I mentioned, we’re excluding several key revenue streams that are difficult to derive from publicly available figures.

And then there’s this: Beginning this year, the Astros will begin garnering revenues from CSN Houston, the regional sports network partnership between Comcast, the Astros, and the NBA’s Rockets. By the new agreement, the Astros own 46.384 percent of the new regional sports network, and they will see revenues from CSN Houston double to an average of $40 million when the season begins. So, with a projected Opening Day player payroll of between $25-$28 million, and all the associated revenues that the Astros will enjoy in 2013, the idea that Jim Crane will be repeating the “franchise lost money” comment made this year at this time in 2014 might best be described as laughable.

Except for one notable caveat—a caveat that the league and clubs should avoid at all costs and that should not be allowed to adversely affect the fan experience. The stripping of payroll and rebuilding over the last five years had as much to do with Crane being able to purchase the club as it does with the Astros eventually fielding a competitive roster. According to the SportsBusiness Journal, Crane borrowed $220 million of the sale, on top of $55 million in loans from the league’s credit facility. There was also a $68 million loan (or a 10 percent stake in CSN Houston) issued from McLane to Crane to assist in him in closing the deal.

This debt pay-down could be at the heart of the Astros’ financial troubles. But if there is one thing with which an MLB club should not burden its fans, it’s the complex, detrimental effect that being over-leveraged has on its ability to put a successful team on the field. The plan that general manager Jeff Luhnow has developed might make sense, but was the rebuilding process the best decision from a baseball perspective or one necessitated by fiscal restraints resulting from the sale?

Clearly, the club is heavily debt-laden, and that raises the question of whether the Astros will be forced into their current non-competitive position until the debt is paid off. If so, then the follow-up question is whether it makes sense for the Astros to have been placed in such a highly-leveraged position in the first place. Given Crane’s well-publicized deep pockets—his net worth is reported to be $1.3 billion—one wonders why the new owner couldn't have covered the cost himself.

Maury Brown is an author of Baseball Prospectus. Click here to see Maury's other articles.
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Is there anyway to tell how much of the debt has been written onto the franchise's books? Is it possible that Crane put that $220m loan on the Astros? Or even all $330m?

The Glazer family did that when pruchasing Manchester United so the Glazers, personally, had very little exposure to the risk while the club assumed nearly $1b in debt. (I'm not a finance guy, so forgive me if I've used some terms incorrectly.)

Nice article. One question. Are the revenues from MLBAM and MLB Network gross revenues or net of expenses? In the overall scheme of things, MLBAM would still be a huge cash cow but I would think that continuing developmental and operating expenses for that venture would be substantial. Either way, still a huge profit.

This is a great question. The SBJ article simply says that MLBAM revenues in 2011 were at $685 million. It does not specify with net of expenses.

This would hold true of other streams, as well. The estimates on MLBP and revenue sharing were based on the leaked financial docs for the Marlins and Rays. I was conservative in my estimates because of factors such as you mention.

For others reading, this is not an exacting set of numbers. Unless the Astros and MLB are willing to release financial figures (you may all sit down and have a good laugh on that one), this is a case of using available figures to derive a balanced look at the streams that are available to clubs, such as the Astros.

One thing to mention... No one has asked Crane just how deep the losses have been. The question becomes, how did a club get so far out of skew that the massive cuts that have taken place doesn't absorb any costs. If the Astros are the model, then 90% of the league would be running in the red and we all know that's simply not the case.

You can always tell when a sports team owner is lying about the teams profitability; his lips are moving. It's always struck me as odd that people can simultaneously believe that people are rational, profit maximizing robots and at the same time believe that successful businessmen are willing to pay hundreds of millions of dollars for a money losing business with, according to them, no hope of ever turning a profit.

I didn't see a mention for operating expenses--e.g., what it takes to keep a ball park and team running. You did mention front-office personnel salaries as not included, but those would be dwarfed by, for example, utility bills for running a ballpark. Add to that the army of workers that staff the park, spring training facilities, capital investment in all manner of equipment, and so on.

It wouldn't shock me to find out that operational expenses were in the tens of millions. Add to that non-trivial debt service, that some of these revenue streams are gross, not net, and I can see how an owner could say with a straight face that he's losing money (which may be owner-speak for "not making as much as I'd like").

Fair enough. But, I'd like to hear from Crane (or for that matter Loria) as to why their clubs are bleeding red in the markets they exist in. By population, Houston is the fourth largest market in the U.S. By DMA, it ranks 10th.

But, in doing further research, here's some data that supports Crane....

The lease payment on Minute Maid Park is $3.4 M, paid semi-annually to the Authority (two payments of $1.7M)....

The Tenant (Houston Astros) is responsible for all costs associated with the operations of the "Leased Premises and Concession Improvements"...

The Tenant is responsible for the following:
(a) “Perform all Maintenance and all Capital Repairs, or cause the performance of all Maintenance and all Capital Repairs, necessary to keep and maintain the Leased Premises and Concession Improvements in a First Class Condition and in a manner reasonably consistent with other Comparable Facilities; and

(b) Maintain and keep, or cause to be maintained and kept, the Leased Premises and Concession Improvements in a clean, neat and orderly condition given the nature and use of the Leased Premises and Concession Improvements.”

Thanks for that. Still a lot of operational expenses to be accounted for, but even so, you'd think it wouldn't be that hard for an owner to at least break even.

BTW, you can bleed red in large markets by (a) not having good TV contracts, and (b) not drawing because you have a poor team.

Had friends in Houston years ago that joked someone there was trying to have his car stolen so he could collect on the insurance. Parked it in a bad part of town, windows down, keys on the driver's seat. To sweeten the deal, he put two Astros tickets on the dash. When he came back the next day, the car was still there--with four Astros tickets on the dash.

Always keep in mind that Frank McCourt bought the Dodgers for $421m, the team 'lost money', primarily due to multimillion dollar payouts to various McCourts, and then was ultimately sold for $2B, a nifty profit of $1.6B. I think all of us would gladly 'lose' as much money as Frank McCourt.